Syndicated Columnists

W.Va. Tax-cut fairy: Part II

June 16, 2012

This month Century Aluminum petitioned the West Virginia Public Utility Commission, for a special rate, in the purchase of electricity as part of its joint effort with the state to reopen a Ravenswood plant that closed in 2009 resulting in 650 workers being laid off.

But a third party response to Century's petition warns that the cost of the requested subsidy is "staggeringly high." While reminding the PUC that the goal is "a thriving Ravenswood plant, competitive over the long term," the response explains why that outcome isn't likely. It suggests that Century may board up the plant when the subsidy ends in 2021 noting that the company's own appraisers reported in 2009 that the plant "suffers from severe functional and technological obsolescence." Nor is there any indication that Century intends to invest in modernization.

But the response's most scathing criticism is that the rate request will result in a "guaranteed profit margin" for Century, insulating it from business risk and passing costs to West Virginia rate-payers, perhaps adding as much as $144 annually to the average residential electric bill. When combined with additional tax incentives already passed by the state legislature, the total taxpayer-funded subsidy comes to between $40 and $50 million dollars a year.

This is the kind of indictment you would expect from a do-gooder public interest group. Except that's not where it came from.

The response was submitted by Appalachian Power Company, the electric company that stands to see its business grow by about 10% in West Virginia if the PUC approves Century's petition. So, why is APCo, an apparent beneficiary, raising concerns? And why in the face of these issues did the legislature approve its part of the deal with almost no debate and only one dissenting vote?

The answers to these questions speak volumes about the doubtful math, craven politics, and absence of accountability surrounding targeted tax incentives which can cost hundreds of millions of dollars and whose results are almost never analyzed.

In recent months, in addition to the Century incentives, the state offered $84 million worth of incentives to Gestamp, a German auto parts manufacturer, for the location of a plant in South Charleston and over $300 million to Royal Dutch Shell for the famous ethane cracker plant that was lost to Pennsylvania.

Why is the state so generous? "Jobs," we are told about 400 associated with both the Century and Gestamp deals and as many as 20,000 associated with the Shell cracker plant according to the governor. But, the question is, at what cost?

A common denominator of the Century and Shell incentive packages is that the administration claims there would be zero cost to the state since the incentives apply only to hypothetical future revenues and have no effect on current income. Of course, this argument blithely ignores the Century deal's possible hike in electric rates, which isn't counted as a cost to the state because the proceeds would go directly to APCo.

As for additional costs stemming from increased demand for public services - schools, roads, police, the courts, etc. - the administration insists these would be offset by increased income taxes collected from newly employed workers. But, the math behind such claims is unverifiable because the state refuses to reveal its underlying assumptions.

This refusal is assisted by a provision in state law that exempts many West Virginia Development Office documents from Freedom of Information requirements. And in a state where politicians and industries regularly overstate benefits and understate costs, there's little reason to have confidence in the administration's claims, particularly when there is valuable political capital to be gained by "creating jobs."

A second problem is that, while some targeted incentives are designed to help West Virginia compete with other states, as in the case of the cracker plant, others merely subsidize ventures that the free market has determined are economically non-viable. That's the case with Century.

In addition to concerns about obsolescence at the Ravenswood plant, Century's financial condition is uncertain. Since 2008 Century's stock price has dropped by 90 percent from a high of $75 a share to just over $7 a share. The investment management firm Macroaxis puts Century's chances of going bankrupt at 43 percent.

Moreover, Century's subsidies are pegged to the market price of aluminum to insure that the company makes a profit. The lower aluminum prices go and the worse Century's business environment becomes, the more money West Virginia taxpayers must fork over. It's "heads, Century wins and tails, West Virginia taxpayers lose."

Finally, targeted tax incentives have a corrosive effect on the state's ability to raise revenue. When one company gets a special break, resistance to new taxes from other taxpayers and pressure for compensatory tax relief increases, making it more difficult for the state to fund vital services. A similar consideration almost certainly contributed to APCo's concerns about the Century deal. If APCo customers have to absorb rate increases because of Century, they and the PUC will be less receptive to future rate increase requests that APCo may request for its own purposes.

These are the kinds of dynamics that make targeted tax incentives abhorrent not just to left-leaning public interest groups, but also to conservative ones such as the Tax Foundation. And their concerns are especially pertinent in a state such as West Virginia that shrouds its economic assumptions in secrecy and practices little accountability once incentives are given.